ISLM model Essay Example | Topics and Well Written Essays - 1000 words

ISLM model - Essay frameworkmoney demand equals to money supply. In the IS-LM model, money demand is assumed to be given exogenously at each pose of time. It is the Central Bank, which determines money supply in any economy at any given point of time. The intersection of the two curves is known to be as the point of general symmetry at which both the money market and the goods market are in equilibrium.In the above figure, the positively sloped curve is the LM curve, while the negatively sloped curve is the IS curve. E* is the intersection point of the two curves and represents general equilibrium. r* and y* is the general equilibrium set of r and y at which goods and money markets are simultaneously in equilibrium.Whether an economic model is reliable in terms of the values of different variables that it predicts and/or whether an economic model is capable enough of capturing what is actually happening in the in truth world depends on the reasonability of the assumptions it i s based on. To examine how well IS-LM model captures what actually happens in the economy, one demand to check whether the two sanctioned assumptions of the IS-LM model are reasonable.The major problem with the IS-LM model is that its two basic assumptions mentioned above have certain limitations and for this reason in spite of being a fundamental macroeconomic model, economists not very frequently use it for estimating the parameters involved in this model as well as the future values of output. (Clarida and Gertler, 1999First, consider the problem with the assumption of price rigidity. IS-LM model always makes a divination that equilibrium can be obtained at any level a it considers a passive mannequin of supply. According to this model, producers produce whatever is demanded by the buyers. In IS-Lm framework, if in an economy demand changes, then the economy will make all the adjustments to that change in demand in